Lloyds TSB is in talks with Financial Services Authority over the mis-selling of a type of stock market-linked bond.

In December, the FSA said it expected to take "enforcement action" against a number of firms over the sale of so-called precipice bonds.

The bond under the spotlight is the Scottish Widows Extra-Income Growth Plan, sold in branches and through advisers, between October 2000 and May 2001.

Lloyds TSB, which owns Scottish Widows, told BBC News Online that it was too early to say if it would challenge any preliminary decision made by the FSA.

However, the bank could face a hefty fine and compensation bill if it were unsuccessful.

Capital risk

Precipice bonds, as they have been dubbed, offer regular, high, income.

But with some of the products, investors can lose all their original investment, making them risky options.

In the current low interest rate environment, thousands of savers have been attracted to the products, as they generally offer a rate of income that is much higher than traditional savings rates.

But the FSA is concerned about whether consumers - many of whom were retired - always understood the risks involved.

In December, the FSA acted on these concerns and issued an official warning and guidance note to consumers.

Complaints deluge

The regulator also announced it was looking into a number of firms.

John Tiner, managing director of the FSA, told the BBC recently: "We already have a number of those cases where we will be moving ahead with enforcement action against the relevant firms."

The Financial Ombudsman Service said it expected to receive more than 2,500 complaints within the next year about concerns over the way some precipice bonds were sold.

But, so far the ombudsman is currently looking into a handful of cases.

Savings headache

In December 2002, Lloyds received a �1m fine from the FSA for mis-selling of endowment policies by its insurance arm Abbey Life.

The bank put aside �165m to compensate up to 46,000 policyholders who have been affected.

The regulator said it could be up to a year before any of the cases with the firms involved were settled.

If firms appeal, the enforcement procedure can be very lengthy - and could end up at the Lord Chancellor's Financial Services & Market Tribunal.

Lloyds said it was looking at compensation claims for its customers.

If someone complains, the bank would carry out a "fact find".

It would look at sales records, and assess the customers' attitude to risk, their past investments and previous expectations before it made its decision.